597 B.R. 287
Bankr. M.D.N.C.2019Background
- Debtor filed Chapter 7 on Oct. 17, 2018; Trustee C. Edwin Allman, III negotiated a $150,000 settlement of the debtor’s primary nonexempt asset — claims in a pending civil suit against Mountain Commerce Bank (MCB).
- Debtor later obtained full‑time employment (Musubu) and amended Schedules I/J reflecting modest increased monthly household net income (disputed and partly speculative).
- Debtor moved to convert to Chapter 11 to (1) include postpetition income in the estate and (2) regain control of the civil litigation and reject the Trustee’s settlement.
- Respondents (MCB, Wanu, Trustee, Bankruptcy Administrator) opposed, arguing conversion would cause substantial postpetition diminution of the estate, lacked a reasonable likelihood of rehabilitation, and was made in bad faith to shift litigation risk to creditors.
- The Trustee’s settlement, if repudiated by conversion, would immediately remove $150,000 from the estate and eliminate MCB’s agreement not to participate in distributions — a substantial certain recovery replaced by speculative litigation proceeds.
- Debtor made disclosure errors/omissions (undisclosed/incorrect transfers and debt amounts) and postpetition attempted to interfere in the civil case, raising concerns about motive and good faith.
Issues
| Issue | Debtor's Argument | Respondents' Argument | Held |
|---|---|---|---|
| Whether cause exists under 11 U.S.C. §1112(b)(4)(A) (substantial postpetition loss + no reasonable likelihood of rehabilitation) | Conversion would combine postpetition income and preserve/liquidate civil claim in Chapter 11 yielding greater creditor recovery than Chapter 7. | Repudiation of Trustee’s $150,000 settlement is a substantial postpetition loss; Debtor’s income and litigation value are speculative; Chapter 11 costs will exceed benefit. | Denied: court found substantial postpetition loss (loss of $150,000 settlement) and no reasonable likelihood of rehabilitation. |
| Whether Debtor acted in good faith or abused the bankruptcy process | Debtor asserts explanations for schedule errors and that actions were to protect interests of Hunter Family Capital as plaintiff. | Debtor omitted/understated transfers and debts, interfered with estate litigation, and seeks conversion primarily to control lawsuit and shift litigation risk to creditors. | Denied: court found lack of good faith; conversion sought to shift litigation risk and regain control of estate asset. |
| Whether Marrama and related precedent permit denial of conversion where debtor is ineligible or conversion would be abusive | Debtor contends §706(a) grants broad right to convert and eligibility exists. | Respondents rely on Marrama, Law v. Siegel, and line of cases applying §1112(b) to deny conversion when cause exists. | Court applied Marrama/Law rationale and §1112(b) to deny conversion as abusive and prejudicial to creditors. |
| Whether debtor’s financial projections and liquidation analysis justify conversion | Debtor presented a liquidation analysis predicting higher returns in Chapter 11 based on speculative litigation recovery and postpetition income. | Analysis omits Chapter 11 administrative costs, fails to account for creditor claims (MCB, Wanu), and relies on speculative litigation outcomes and unadopted budget. | Court held analysis unreliable and speculative; not sufficient to show likelihood of rehabilitation. |
Key Cases Cited
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (Sup. Ct. 2007) (court may deny conversion where debtor’s conduct or ineligibility shows cause; §105(a) may justify immediate denial).
- Law v. Siegel, 571 U.S. 415 (Sup. Ct. 2014) (bankruptcy court may act to promptly deny unmeritorious conversion attempts; Marrama rationale affirmed).
- Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989) (good‑faith filing is implicit; courts examine totality of circumstances for bad faith).
- Little Creek Dev. Co. v. Commonwealth Mortg. Corp., 779 F.2d 1068 (5th Cir. 1986) (objective futility of reorganization relevant to bad‑faith inquiry).
- In re Daughtrey, 896 F.3d 1255 (11th Cir. 2018) (affirming denial of conversion where statutory cause under §1112(b) existed).